Infinite Banking: Can Life Insurance Help You Finance Your Goals?

What if your life insurance policy could do more than provide a benefit to your family? That question is behind a strategy often called infinite banking.

The name can make it sound as though you are opening your own bank. What you are actually doing is building cash value in a permanent life insurance policy and, when appropriate, borrowing against that value. It can be useful in some financial plans, but the details matter.

How does infinite banking work?

The strategy is commonly built around a whole life insurance policy designed to accumulate cash value. As you pay premiums, the policy provides life insurance coverage and may build value you can access over time. Once sufficient loan value is available, you may be able to request a policy loan for a planned expense, a business need, or another goal.

A policy loan is not free money. The insurer charges interest. An outstanding loan and its interest can reduce the amount your beneficiaries receive, and a growing loan balance can put the policy at risk. The available cash value, loan terms, and future policy values depend on the particular contract.

Why do people consider it?

Some people like having a source of funds within a policy they already own. Others value the combination of permanent life insurance protection and cash value they may be able to use during their lifetime.

That combination comes with a cost. Whole life insurance generally costs more than term life insurance, and building meaningful cash value takes time. Before buying a policy for this strategy, you should be comfortable paying its premiums over the long term.

Questions to ask before using the strategy

A useful illustration should help you answer:

• How much will I pay in premiums, and for how long?
• What are the guaranteed cash values, and which projected values are not guaranteed?
• How much could I borrow in the years when I expect to need money?
• What interest rate applies to a policy loan?
• What happens to the cash value and death benefit if I borrow and repay the loan? What happens if I do not repay it?
• Could the policy lapse with a loan outstanding?
• How does this compare with term life insurance plus a separate savings or investment plan?

Tax treatment also deserves careful review. Policy loans are often discussed as tax advantaged, but that is not an unconditional promise. For example, different rules apply to a policy classified as a modified endowment contract, and surrendering a policy for more than its tax basis can create taxable income. Discuss the details of your policy and plans with a qualified tax professional.

Where does it fit in a financial strategy?

At Black Apple Group, we believe the starting point is the goal, not the product. First, determine how much protection your family needs. Then look at your debts, cash reserves, and the money you can reliably commit to a long-term plan.

Infinite banking may be worth exploring if you need permanent life insurance, can sustain the premiums, and understand how policy loans affect the coverage. If your main need is affordable protection or money you may need soon, other options may fit better.